International Political Economy (IPE)

International Political Economy (IPE) International College KhonKaen University Week 9 – Institutional Framework of IPE (2)

Institutional Framework of IPE: Global Business • Governments are important in IPE because they set the rules of international trade, monetary flows and labour mobility • They generally aim to create a business-friendly environment which encourages investment and trade • The rights kinds of investment and trade help to create jobs, increase skills, productivity and GDP • It is then the governments’ job to use this increased GDP to reduce poverty and inequality

Institutional Framework of IPE: Global Business • Market forces of supply, demand, best use of resources (land, capital, labour and raw materials), and competition are most efficient at utilizing a country’s assets to create jobs and money for development • Governments are generally not good at business – the use of market forces to maximize returns on the country’s assets • Most countries rely on private business to convert assets to welfare, security and prestige

Institutional Framework of IPE: Global Business • This week we will look briefly at the important role of business in IPE: • how global business operates, and impacts on: • international economics • the economies of individual countries • the expanding role of multinational corporations (MNCs) in international business

Global Business • Global business is driven by the same market forces as businesses everywhere: profit • Profit is maximised by: • Reducing the costs of producing a product or service • Selling the same or a similar product to as many people as possible • Selling products or services that people want (or think they need) by continuously improving its appeal through quality and features • Selling to those markets that offer the highest profit

Global Business • As international trade becomes easier, businesses have more choice about: • Where to source their raw materials • Where to make/process their products or services • How to make their products or services • How to finance business expansion • Where to sell their products or services to maximize profits • How to exploit differences between countries to reduce costs

Global Business • For the first time in history, production, investment and marketing are being organized on a global scale • Businesses locate different activities in different places to: • Take advantage of cheaper factors of production • Access pools of skilled labour • Reduce transportation costs • Avoid tariff and non-tariff barriers • Reduce compliance costs • Obtain tax advantages

Global Business • Increasingly, businesses relocate their activities to avoid tough government regulations such as: • Banking rules • Currency restrictions • Labour and environmental regulations • In the process, international businesses become not only commercial organizations, but also political ones • Global businesses seek to influence the policies of both home and host governments

Global Business in IPE

Global Business • In the theoretical framework of IPE: • Liberal and neo-liberal economists see global business as good for the world as economic growth is maximized through an efficient market mechanism, and helps to bring peace, stability and cooperation • Realists (statists) see business and MNCs as economic actors that should be controlled by the state • Marxists (radicals) see global businesses as the modern tools of oppression of the capitalist elite, exploiting workers and poor states

Multinational Corporations • A multinational corporation (MNC) is any company that owns or controls operations in more than one country • MNCs are, like NGOs, are non-governmental – but exist primarily to make a profit • MNC operations impact on international economic relations, on jobs, on economic growth and development, on work standards and on the environment

Multinational Corporations • MNCs play an important role in the globalized economy because of the large volume of economic assets they move around the world: • Goods and services, including natural resources which may be very scarce • Capital (investment, payments, profits) • Technology • Human capital (managers, professionals, skilled workers) • Marketing, branding and public relations skills

Multinational Corporations • There are an estimated 70,000 MNCs in the world • These 70,000 MNCs have: • One million subsidiaries or affiliated companies • Employ more than 70 million people • The top 100 MNCs produce 25% of the world’s wealth • The top 1,000 MNCs account for 80% of the world’s industrial production

Multinational Corporations • The UN estimates that MNCs account for around two thirds of the world’s exports and one third of the stock of foreign direct investment • In the early 1980s, the headquarters of most of the world’s largest MNCs were located in the USA, Western Europe and Japan, but 80% of their employees worked in developing countries or NICs • MNCs are often the principal beneficiaries of economic globalization

Multinational Corporations • The proportion of the world’s 500 largest companies based in emerging markets doubled in 5 years – from 8.2% in 2005 to 17.4% in 2010 • China (3rd) and South Korea (8th) are the only two emerging economies in Fortune’s 2011 ranking of the top 10 countries with the most global 500 companies • Three Chinese companies are listed in the top 10 global MNCs based on annual revenue

Multinational Corporations • The immense wealth of the world’s MNCs gives them considerable political influence, especially in smaller countries • A comparison of countries’ GNIs and the sales of MNCs in 2007 shows that 49 of the world’s largest economies are corporations , 51 are countries • States and NGOs are keen to develop international mechanisms and standards to better regulate MNCs

International Political Economy (IPE)